BERLIN -- The dollar spiked to a three-month high against the euro
Thursday after the U.S. Federal Reserve signaled it would start undoing
some of its emergency support measures next year as the economic
recovery gathers pace.

Though the Fed reiterated its pledge to keep interest rates near
zero, it noted improvements in the economy and detailed the beginnings
of a plan to dismantle a number of its extraordinary lending measures
in 2010.

The news stoked speculation the central bank might increase interest rates sooner than expected, leading many investors to shift back into the dollar.

"The trigger for the dollar rebound is the Fed confirming that many of its liquidity providing measures will be unwound early next year," said Hans Redeker, global head of foreign exchange strategy at BNP Paribas.

By early afternoon Berlin time, the euro was worth $1.4355, way down on the $1.4516 it was trading late Wednesday in New York. Earlier, the euro had fallen to $1.4330, its lowest level since Sept. 7.

Meanwhile, the British pound slipped to $1.6126 from $1.6310 the night before, while the dollar rose slightly to 89.94 Japanese yen from 89.90 in New York.

The dollar has enjoyed a strong rally in December, partly because of mounting confidence about the outlook for the U.S. economy following a string of better than expected economic data, but also because of growing worries about the creditworthiness of some of the countries on the periphery of the 16-country eurozone.

On Wednesday, Standard & Poor's downgraded its credit rating on Greece, arguing that the government's new economic plan was unlikely to lead to a "sustainable" reduction in the country's debts.

"While there are no realistic expectations that the deficit issues facing Greece -- and Ireland, Spain and Portugal -- will lead to a breakdown of European Monetary Union, the problems do highlight that an inflexible and strong exchange rate can be a burden in times of stress," said Jane Foley, research director at Forex.com.

Also affecting trading at the moment is the looming year-end -- many traders are looking to lock in gains on the euro's rise earlier in the year.